Louis Mangione

Innovations in Education, Inc.

Unrestricted Subsidiary Credit Agreement

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A typical covenant set prevents a group of companies from taking certain measures by applying restrictions to a designated entity (hereinafter referred to as “entity”) and its “restricted subsidiaries”. This can be defined as a “small group”. By default, all subsidiaries of the company are part of the restricted group, unless they are expressly identified as “unlimited”. Not all parent companies of the company are usually part of the core group. The designation of a subsidiary as an unlimited subsidiary is reversible and the company may be reintegrated into the core group. This frees up all the limited payment capacities used to designate the relevant unlimited subsidiary. However, the main restriction is that the limited group must be able to incur debts held by the unlimited subsidiary under the limited group debt agreement. Since one of the reasons for designating an unlimited subsidiary could be to raise debts, it is quite possible that the debt incurred figure is too large to bring the unlimited subsidiary back into the core group or consumes a significant amount of the debt capacity. To determine whether an entity is able to transfer a valuable asset to a full subsidiary, the investor must reconsider both the agreement limiting “limited payments” and the definition of an “authorized investment”. A specific basket for investments in unlimited subsidiaries is not exclusive, the company could use a general investment basket, a general restricted payment basket and an available “builder” basket. If the investment in an unlimited subsidiary is that of a non-insolvent asset of the company, the issue becomes a matter of value. The entity must determine the valuation of the asset to classify the investment in its covenant exemptions.

The investment agreement in a financing agreement generally stipulates that the amount of the investment is the fair value of the investment set by the board of directors of the company at the time of the investment. This can be a contentious point – investors and the company may have two totally different rules of fair market value. The designation of a subsidiary as an unlimited subsidiary requires, in certain circumstances, that the group prepare separate quarterly and annual financial reports for the core group, with the exception of unlimited subsidiaries. . . .

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